Can Using Cash Save You Money?

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Today, I’m going on an all cash diet. That means I’ll be shedding all plastic – credit cards – in favor of the classic US dollar. And for the following two weeks, I’ll only use cash as a method of payment. If it can’t be purchased with cash, I can’t buy it. In doing so, I want to see if I realize a noticeable spending reduction.

Credit Is King

Despite the trite cliche, cash isn’t king anymore; rather, credit is. Plastic has largely replaced cash as our tool for spending. Cash can be lost and/or stolen, and it takes time for the exchange of funds. Credit cards are easily replacable, convenient, and offer cash back. When traveling domestically or internationally, credit cards are a slim and simple accoutrement; cash, on the hand, can be bulky and inconvenient. It’s actually illegal to cross international borders without declaring cash in somes of $10,000 or greater. With credit cards, I can carry a credit limit that’s nearly six figures.

Unfortunately, that accessibility to ample amounts of capital can also wreck your budget. The fact is, cold hard cash – that fungible form that’s a perfect combination of paper and fabric – may be the key to shoring up your budget.

Cash Envelope System

A few months ago I wrote about how Dave Ramsey’s cash-based economics may not work for Millennials. This generation is used to all things digital. Millennials are really the first to start with computers from birth. The digital world largely makes sense when you’ve always had it that way. Credit cards are perfect – too perfect – for this group.

Credit card statements, bills, and activity can all be checked online; in fact, some are mandatory to avoid fees. These “features” all have a distancing quality that may delay the realization of hefty spending. And while it may be difficult for Millennials to follow Ramsey’s cash envelope/budgeting system, the experiment is still important.

Ramsey isn’t the only one extolling the wonders of an all-cash system. The Guardian’s Oliver Burkeman has repeatedly focused on the redeeming values of cash.

My purpose was to see if I’d spend more frugally. It’s hardly news that people spend more freely with credit cards than when they’re using cash. But until recently, researchers who study the psychology of money had assumed this was for one reason only: “payment decoupling”, a fancy term for the fact that credit cards mean you get to enjoy your new pair of jeans, or Learjet, weeks or months before you have to part with the money. Newer studies, though, add a fascinating wrinkle: spending actual cash feels uniquely painful even when decoupling’s not an issue.

The 2-Week Cash Experiment

With these inspiring authors in mind, I’ve decided to experiment with an all-cash experiment for two weeks. Much like the format of my spending cleanse, this experiment will last for two weeks.

The rules are simple:

1. No credit card purchases.

2. No debit card purchases (except for ATM withdrawals).

3. Everything I buy must be paid for in cash.

Along the way, I’ll reflect and write for you. Each time I immerse myself in another experiment, I learn something about my spending habits. Using cash, I’m hoping to actually be able to realize, reduce, and prevent excess spending.

After two weeks, I’ll focus on the journey as a whole. It’s my hope that this experiment will help you realize how you spend money and if there’s room for improvement.

That’s a great question! Like with my spending cleanse challenge, I tended to leave out those details. I have automatic payment setup for utilities and rent through my checking account. Thus, I don’t tend to consider that it’s a credit or debit payment; rather, more of a check scenario. But you make a good point, which I’ll address in my first reflection!

My mom did the cash envelope system years ago when she was in a money crunch, and it worked really well for her. I have always used a combo of cash and credit. I pay my credit card off at the end of the month, and my credit card gives cash rewards, so that’s a motivator to use it for gasoline, groceries, etc. I think with cash, though, the use of your money feels more concrete–I broke a hundred dollar bill at the grocery store recently, and the clerk said, “Ouch, you break a hundred, and then it’s gone!”

Thanks for your terrific comment! You’re absolutely right, when you start using cash it makes purchases more concrete and real. This is the reasoning behind a lot of research that suggests that people spend more frugally when they see money leave their hands.

By paying off your credit cards each month in full, you’ve definitely benefited from cash back. But the question that remains is if the cash back is worth the possibility of spending more…

There is always the possibility of spending more, even with an all cash system. It comes down to want vs need. If you can’t control yourself with a card you will have just as hard of a time controlling yourself with cash.